BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
XXXXX
Petitioner, : FINDINGS OF FACT,
v. : CONCLUSIONS OF LAW
: AND FINAL
DECISION
AUDITING
DIVISION OF THE :
UTAH STATE TAX COMMISSION, : Appeal
No. 88-1644
Respondent :
_____________________________________
STATEMENT OF CASE
This
matter came before the Utah State Tax Commission for a formal hearing on
XXXXX. James E. Harward, Hearing
Officer, Joe B. Pacheco, Commissioner and G. Blaine Davis, Commissioner heard
the matter for and in behalf of the Tax Commission.
Present
and representing the Petitioner was XXXXX, Attorney at Law. Present and representing the Respondent was
XXXXX, Assistant Attorney General.
The
appeal represented the consolidation of two cases: XXXXX v. Auditinq
Division of the Utah State Tax Commission, appeal No. 88-1500; and XXXXX
v. Auditinq Division of the Utah State Tax Commission, appeal No.
88-1644. The identical nature of the
issues involved in the two cases made the consolidation practical.
Based
upon the evidence and testimony presented at the
hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is sales tax.
2. Pursuant to the audit of XXXXX for the
period XXXXX through XXXXX, the Auditing Division assessed additional sales and
use tax in the amount of $$$$$.
3. Pursuant to an audit of XXXXX for the period
of XXXXX through XXXXX, the Auditing Division assessed additional sales and use
tax in the amount of $$$$$.
4. Petitioners operate XXXXX stimulation and
stabilization services encompassing these types of services:
(1) XXXXX;
(2) XXXXX;
(3) XXXXX;
(4)
XXXXX.
5.
XXXXX involves the placement of various
XXXXX compositions, fluids, and slurry compositions, into various places in the
well. The purpose of XXXXX is to stabilize the well and/or to separate zones
within the well hole.
6. XXXXX involves the injection of XXXXX fluids
that are created with various additives into a well bore to extend the well
bore laterally into the formation.
7. XXXXX is an extension of XXXXX 0using
hydrochloric acid in combination with other agents to improve the flow capacity
of a well by dissolving deposits that may be plugging channels in the rock.
8. In XXXXX, a special grade of XXXXX Cement is
used with any combination of 54 additives, the use of which is dependent upon
the conditions of the well. The actual
formula of the cement used for each well is recommended by Petitioner's
representative.
9. Without the expertise of the employees of
the Petitioner, the raw chemicals or cement are of little value to the well
operators, and likewise the services are of little value to the well operators
without the raw materials.
10. Because neither the materials nor the
services are of much value to the customers without the other, it is not
important to the customer how the price is allocated between the materials and
the services. The customer does not buy
one without the other. Therefore, if
only the materials were taxable then XXXXX could reduce the taxes by simply
reallocating the price from materials to services.
11. The customer is purchasing the final product
in the hole where it has its only value to the customer. The final product has value to the customers
of XXXXX only after the materials and services together have been provided to
the customers.
12. Petitioner did not pay sales tax on
materials it purchased. Petitioner charged sales tax to its customers on the
materials and remitted that amount to the State Tax Commission. The Petitioner did not charge sales tax on
the portion of its invoice price which it claims was the labor portion.
13. Concerning cementing services, XXXXX
synthesizes materials and services to provide a finished product which
stabilizes the pipe located in the well.
Once poured, the cement cannot be removed. The cement permanently affixes the casing to the surrounding hole
and becomes real property.
14. When XXXXX delivers the products to the well
operators, XXXXX makes its recommendations regarding the precise formulas to be
used and the method of placement in the well.
However, the well operators make the decisions to accept or reject the
recommendations of XXXXX. The contracts
contain a specific provision which states: "work done by XXXXX shall be
under the direction, supervision and control of the owner, operator, or his
agent and XXXXX will perform the work as an independent contractor and not as
an employee or agent of the owner or operator." Thus, it is the well operators (customers of XXXXX) that convert
the materials (cement) acquired from XXXXX into real property.
15. The cementing services of XXXXX are similar
to a ready mix concrete company that sells concrete to a building contractor
and pumps it to the location where it is needed by the contractor. In that case, as well as this case, the
delivered product is subject to sales tax on the total charge, including the
sellers cost for materials, labor and profit.
In the case of a ready mix company selling and pumping concrete to a
building contractor, when the concrete is converted to real property it is
converted by the building contractor and not by the ready mix company. In this case, when the cement is converted
to real property it is converted by the XXXXX well owner and not by XXXXX.
16. In contrast to the XXXXX services are not
operations in which the involved personal property becomes part of or attached
to real property. In each of these
services the personal property used in stimulation becomes part of the
production of the well and is returned when XXXXX and other fluids are taken
from the well. In these cases, XXXXX
has sold the products to the final consumer, and sales tax should have been
collected on that sale to the final consumer.
17. In XXXXX, XXXXX, through its holding
company, XXXXX, and XXXXX, combined to form a partnership known as XXXXX. XXXXX contributed 72% of the new
partnership's assets including the contribution of the motor vehicles in
question. XXXXX contributed 28% of the
assets. XXXXX received a 72% interest
in the partnership, and XXXXX received a 28% interest in the partnership.
Based
upon the foregoing Findings of Fact, the Tax Commission now makes and enters
its:
CONCLUSIONS OF LAW
1. There is a tax levied on the purchaser for
the amount paid for retail sales of tangible personal property made within the
state. (Utah Code Ann. §59-12-103)
2. Sales of tangible personal property to real
property contractors and repairmen of real property are subject to sales tax.
3. Sales of vehicles required to be titled or
registered within the laws of this state are not exempt from sales taxes as
isolated or occasional sales, except that any transfer of a vehicle in a
business reorganization where the ownership of the transferee organization is
substantially the same as the ownership of the transferrer organization shall
be considered an isolated or occasional sale.
(Utah State Tax Commission Administrative Rule R845-19-38S(c).)
4. Two business entities Transferring assets to
form and organize a new legal entity does not constitute a business
reorganization. Instead, the two
original entities have formed a new and separate entity.
5. XXXXX is not a real property contractor
within the meaning of R86 5-19-58S.
Instead, the portion of its product which XXXXX has labeled as services
is really charges "for fabrication or installation which is part of the
process of creating a finished article of tangible personal property" (the
cement which is sold to the well operators) pursuant toR865-19S-51.
ISSUES
In
both cases there are essentially two issues to be decided:
1. Is
sales and use tax imposed on all of the charges made by XXXXX and XXXXX, or
only on the portion of the charges which they have allocated to materials?
2. Is
the transfer of motor vehicles to XXXXX from XXXXX exempt from sales and use
tax?
IS THE SALES AND USE TAX IMPOSED ON THE TOTAL
INVOICE PRICE FROM XXXXX TO ITS CUSTOMERS,
OR ONLY ON THE AMOUNT WHICH XXXXX HAS
DESIGNATED AS THE PORTION ALLOCABLE TO
MATERIALS?
In
support of its position that the services are not subject to sales or use tax,
the Petitioner advances two alternative theories:
1. The services are not incidental to the sale
of tangible personal property. Rather,
services rendered are part of a comprehensive service and the sale of concrete
or other well stimulation materials are incidental to that comprehensive service;
2. The Petitioner is a real property contractor
and is exempt from sales and use taxes, except for sales tax on the products
which it purchases.
With
respect to the Petitioner's argument that the services are not incidental to
the sale of the materials used to case the wells and materials used in
stimulating the wells, the Tax Commission finds the argument is not well taken.
While
it is accepted that without the expertise provided by the Petitioner the
materials are virtually worthless for their intended purpose, it is also
accepted, as the Respondent in its brief states that "All of Petitioner's
'services' without the actual materials would be worthless to its
customers. Likewise the materials
without the services to blend them into the correct product and deliver it into
the property would likewise be of for (sic) less value. It is the synthesis of these two things that
comprise the product, the tangible personal property and associated services
that Petitioner transfers to its customers.
It is this synthesis of material and services that is subject to sales
tax" (brief of Respondent page 7).
Where
the Petitioner is in the business of XXXXX stimulation, the Petitioner operates
as a retailer of tangible personal property.
The services that it provides to its customers in the sale of these
products is a necessary component of the final product and is taxable.
This
rationale is consistent with the decision of the Utah Supreme Court in McKendrick
v. State Tax Commission, 9 Utah 2nd 418, 347 P2d 177, (1959). There, the plaintiff, a manufacturer of
artificial limbs, claimed the sale of artificial limbs were exempt from sales
tax. The Petitioner alleged that what
he was selling was a professional service in the making and fitting of the
prosthetic devices and the materials used were such a small portion of the
total charge that they were "merely incidental" to the service
performed. The Utah Supreme Court disagreed with the Petitioner and stated:
It is quite generally true that
"materials", considered separate and apart
from "services", are not worth much.
The value of raw materials depends
upon their abundance or scarcity. These
are usually very small
in comparison to the products into which they are fashioned. Its the taking of ore from the mine or the
tree from the forest and then
making them into something useful which makes the end product desirable and therefore
valuable.
During the process of transformation through
various stages, the value is steadily
enhanced in proportion to the expense of time, energy and skill thereon. An excellent example is the process by which
a pound of iron
ore, worth but a few cents, is mined, smelted, processed, tempered and fabricated into hair
springs for watches worth thousands of
dollars per pound. When one is sold its
value is that of the finished
product and not of the basic materials from which it was made. The same principle applies to the
Petitioner's profits. Id. at 419.
With
regard to the Petitioner's second argument that it is a real property
contractor, the Tax Commission similarly finds such argument to be without
merit. If the Petitioner were a real
property contractor the sale to them of the materials in question would be
subject to sales tax, and sales tax would be paid by the Petitioner and not by
its customers. That, however, is not
how the Petitioner conducted business.
Here, the practice of Petitioner was to not pay sales tax on materials
purchased by them but rather, charge its customers sales tax and remit the
taxes to the Tax Commission. Those
actions were not those of a real property contractor but were those of a retail
sales business which purchased the materials for later resale.
It
appears that the Petitioner would now ask that its own past actions which
showed that it did not consider itself to be a real property contractor be
disregarded simply because it is in its financial interest to do so. This the Tax Commission is not willing to do
and finds such practice to be probative as to the true nature of the Petitioner's
operation.
IS THE TRANSFER OF MOTOR VEHICLES
TO XXXXX FROM XXXXX EXEMPT FROM SALES AND USE TAX
Under
Utah State Tax Commission Rule R855-19-38S, sales of motor vehicles are not
exempt as isolated or occasional sales except "that any transfer of the
vehicle in a business reorganization where the ownership of the transferee
organization is substantially the same as the ownership of the transferrer
organization shall be considered as an isolated or occasional sale".
In
the present case, XXXXX was created specifically to hold the assets of XXXXX
and become a partner with XXXXX in the formation of the partnership known as
XXXXX. XXXXX contributed 72% of the
assets of the new company including the motor vehicles in question. XXXXX contributed the remaining 28% of the
assets.
Under
the facts as set out above, it cannot be said that the ownership of the
transferee organization (XXXXX) is substantially the same as the ownership of
the transferrer organization (XXXXX).
Therefore, the Petitioners have failed to meet the requirements of Rule
R865-12S-38 with respect to the transfer of vehicles.
With
regard to both issues, the Petitioner claims that the findings of the Auditing
Division were contrary to established policies of the Tax Commission. Petitioner argued that the Tax Commission
could not reverse such a policy without complying with the appropriate
administrative rule making statutes.
In
support of this, the Petitioner offered the testimony of a single witness, a
former employee of the Tax Commission, who testified that in his opinion certain
policies regarding the two issues existed.
The
Tax Commission finds that the opinion testimony of the Petitioner's witness was
insufficient to establish that such policy did indeed exist. More importantly, however, there was no
evidence presented which showed that even if such policies were in effect, the
Petitioner relied upon them to its detriment.
Based
upon the foregoing, the Tax Commission finds that the Petitioners failed to
establish by a preponderance of evidence that its XXXXX stimulation services
are exempt from sales and use tax. The
Tax Commission also finds that the Petitioner has failed to establish by a
preponderance of the evidence that the transfer of motor vehicles from XXXXX to
XXXXX were exempt from sales and use taxes.
The findings of the Auditing Division are therefore affirmed. The request of the Petitioner is
denied. It is so ordered.
DATED
this 2 day of July, 1990.
BY ORDER OF THE UTAH STATE TAX COMMISSION
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco G.
Blaine Davis
Commissioner Commissioner